How big Wall Street banks beat off tougher rules

By CHRISTINE HARPER Bloomberg News

Published: Saturday, January 1, 2011 at 1:00 a.m.

Last Modified: Friday, December 31, 2010 at 7:35 p.m.

NEW YORK - Wall Street's biggest banks, whose missteps caused a global financial crisis and economic slowdown two years ago, were more agile when it came to countering the political and regulatory response.

The federal government, promising to make the system safer, buckled under many of the financial industry's protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives. Higher capital and liquidity requirements agreed to by regulators worldwide have been delayed for years to aid economic recovery.

"We continue to listen to the same people whose errors in judgment were central to the problem," said John Reed, 71, a former co-chief executive officer of Citigroup, who estimated only 25 percent of needed changes have been enacted. "I'm astounded because we basically dropped the world's biggest economy because of an error in bank management."

The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley, data compiled by Bloomberg shows.

Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses -- six months after paying $550 million to settle a fraud lawsuit related to the firm's behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.

Wall Street's army of lobbyists and its history of contributions to politicians were not the only keys to success, lawmakers, academics and industry executives said. The financial system's complexity gave bankers an advantage in controlling the narrative and dismissing the ideas of would-be reformers as infeasible or dangerous. A revolving door between government and banking offices contributed to a mind-set that what is good for Wall Street is good for Main Street.

To make their case, bankers and lobbyists characterized proposed regulations as stifling innovation, competitiveness and economic growth. They said the industry had learned its lessons and that firms were adopting changes voluntarily to be more transparent and accountable. Successful companies should not be punished for the sins of those that failed, they said.

"It is important to look beyond the rhetoric and ask the tough questions about underlying structural changes that promote responsible reforms and stability to our financial system, yet support the ability of financial firms to innovate and serve the needs of families and employers," Timothy Ryan, CEO of the Securities Industry and Financial Markets Association, an industry lobbying group, wrote in a Feb. 5 op-ed piece for the Washington Post.

That argument resonated with lawmakers under pressure to boost a fragile economy and bring down an unemployment rate that has hovered near 10 percent since August 2009, its highest level in more than a quarter of a century.

"The big financial industry has convinced a lot of people, particularly in Congress and on the regulatory side, that they bring value to the economy with new instruments and new approaches," said Sen. Byron Dorgan, D-N.D., who is retiring this year. "Anybody who wants to do things that seem aggressive is called a radical populist."

President Barack Obama was elected in 2008, weeks after Lehman Brothers Holdings Inc. collapsed in the largest bankruptcy and the Federal Reserve and government provided unprecedented support to insurance company American International Group as well as nine of the largest banks. Obama, who raised $15 million on Wall Street, promised that his administration would "crack down on the culture of greed and scheming" that he said led to the financial crisis.

While Obama vowed to change the system, he filled his economic team with people who helped create it.

Timothy Geithner, 49, who had been responsible for overseeing banks including Citigroup while president of the Federal Reserve Bank of New York, became Treasury secretary and named a former Goldman Sachs lobbyist as his chief of staff. Lawrence Summers, 56, who is stepping down as Obama's National Economic Council director, opposed derivatives regulation and supported the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial and investment banking, when he served as deputy Treasury secretary and Treasury secretary in President Bill Clinton's administration.

"It was very clear by February 2009 that the banks were going to get a free pass," said Simon Johnson, a former chief economist for the International Monetary Fund who is now a professor at MITs Sloan School of Management.

"You could see from the hiring of Tim Geithner and from the messages that he and his team were putting out that this was going to go very badly."

Even when changes were advocated by people who could not be characterized as radical populists, their ideas were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness.

Geithner was an early opponent of any such ban, arguing that it was not necessary and would not help.

Dorgan, 68, said supporters in Congress backed down because they did not get pressure from their constituents.

Dodd-Frank gave regulators at the Commodity Futures Trading Commission and the Securities and Exchange Commission the responsibility of writing rules governing the $583 trillion market in over-the-counter derivatives. The law, named after Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., requires that most derivatives be traded on third-party clearinghouses and regulated exchanges.

A suggestion that banks deemed too big to fail should be broken up or made small enough to fail -- an idea backed by former Federal Reserve Chairman Alan Greenspan, Bank of England Governor Mervyn King and hedge-fund manager David Einhorn -- also failed to win support from policy makers.

Jamie Dimon, JPMorgan's CEO, said in a January 2010 interview that most of the financial firms that collapsed during the crisis were narrowly focused investment banks, insurers, mortgage brokers or thrifts, not big integrated conglomerates.

"A lot of companies are big because they're required to be big because of economies of scale," he said.

The closest the Obama administration came to trying to limit the size of banks was in January, when the president proposed levying a fee on financial firms with assets of more than $50 billion.

<p><em>NEW YORK</em> - Wall Street's biggest banks, whose missteps caused a global financial crisis and economic slowdown two years ago, were more agile when it came to countering the political and regulatory response.</p><p>The federal government, promising to make the system safer, buckled under many of the financial industry's protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives. Higher capital and liquidity requirements agreed to by regulators worldwide have been delayed for years to aid economic recovery.</p><p>"We continue to listen to the same people whose errors in judgment were central to the problem," said John Reed, 71, a former co-chief executive officer of Citigroup, who estimated only 25 percent of needed changes have been enacted. "I'm astounded because we basically dropped the world's biggest economy because of an error in bank management."</p><p>The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America, JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley, data compiled by Bloomberg shows.</p><p>Goldman Sachs CEO Lloyd Blankfein, 56, and his top deputies are in line to collect more than $100 million in delayed 2007 bonuses -- six months after paying $550 million to settle a fraud lawsuit related to the firm's behavior that year. Citigroup, the bank that needed more taxpayer support than any other, has a balance sheet 14 percent bigger than it was four years ago.</p><p>Wall Street's army of lobbyists and its history of contributions to politicians were not the only keys to success, lawmakers, academics and industry executives said. The financial system's complexity gave bankers an advantage in controlling the narrative and dismissing the ideas of would-be reformers as infeasible or dangerous. A revolving door between government and banking offices contributed to a mind-set that what is good for Wall Street is good for Main Street.</p><p>To make their case, bankers and lobbyists characterized proposed regulations as stifling innovation, competitiveness and economic growth. They said the industry had learned its lessons and that firms were adopting changes voluntarily to be more transparent and accountable. Successful companies should not be punished for the sins of those that failed, they said.</p><p>"It is important to look beyond the rhetoric and ask the tough questions about underlying structural changes that promote responsible reforms and stability to our financial system, yet support the ability of financial firms to innovate and serve the needs of families and employers," Timothy Ryan, CEO of the Securities Industry and Financial Markets Association, an industry lobbying group, wrote in a Feb. 5 op-ed piece for the Washington Post.</p><p>That argument resonated with lawmakers under pressure to boost a fragile economy and bring down an unemployment rate that has hovered near 10 percent since August 2009, its highest level in more than a quarter of a century.</p><p>"The big financial industry has convinced a lot of people, particularly in Congress and on the regulatory side, that they bring value to the economy with new instruments and new approaches," said Sen. Byron Dorgan, D-N.D., who is retiring this year. "Anybody who wants to do things that seem aggressive is called a radical populist."</p><p>President Barack Obama was elected in 2008, weeks after Lehman Brothers Holdings Inc. collapsed in the largest bankruptcy and the Federal Reserve and government provided unprecedented support to insurance company American International Group as well as nine of the largest banks. Obama, who raised $15 million on Wall Street, promised that his administration would "crack down on the culture of greed and scheming" that he said led to the financial crisis.</p><p>While Obama vowed to change the system, he filled his economic team with people who helped create it.</p><p>Timothy Geithner, 49, who had been responsible for overseeing banks including Citigroup while president of the Federal Reserve Bank of New York, became Treasury secretary and named a former Goldman Sachs lobbyist as his chief of staff. Lawrence Summers, 56, who is stepping down as Obama's National Economic Council director, opposed derivatives regulation and supported the 1999 repeal of the Depression-era Glass-Steagall Act, which separated commercial and investment banking, when he served as deputy Treasury secretary and Treasury secretary in President Bill Clinton's administration.</p><p>"It was very clear by February 2009 that the banks were going to get a free pass," said Simon Johnson, a former chief economist for the International Monetary Fund who is now a professor at MITs Sloan School of Management.</p><p>"You could see from the hiring of Tim Geithner and from the messages that he and his team were putting out that this was going to go very badly."</p><p>Even when changes were advocated by people who could not be characterized as radical populists, their ideas were dismissed as unrealistic, misinformed, advancing ulterior motives or damaging to U.S. competitiveness.</p><p>Such tactics helped bat back suggestions from billionaire hedge fund manager George Soros and Berkshire Hathaway Inc. Vice Chairman Charles Munger that regulators ban purchases of so-called naked credit-default swaps -- contracts that allow speculators to profit if a debt issuer defaults.</p><p>Geithner was an early opponent of any such ban, arguing that it was not necessary and would not help.</p><p>Dorgan, 68, said supporters in Congress backed down because they did not get pressure from their constituents.</p><p>Dodd-Frank gave regulators at the Commodity Futures Trading Commission and the Securities and Exchange Commission the responsibility of writing rules governing the $583 trillion market in over-the-counter derivatives. The law, named after Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., requires that most derivatives be traded on third-party clearinghouses and regulated exchanges.</p><p>A suggestion that banks deemed too big to fail should be broken up or made small enough to fail -- an idea backed by former Federal Reserve Chairman Alan Greenspan, Bank of England Governor Mervyn King and hedge-fund manager David Einhorn -- also failed to win support from policy makers.</p><p>Jamie Dimon, JPMorgan's CEO, said in a January 2010 interview that most of the financial firms that collapsed during the crisis were narrowly focused investment banks, insurers, mortgage brokers or thrifts, not big integrated conglomerates.</p><p>"A lot of companies are big because they're required to be big because of economies of scale," he said.</p><p>The closest the Obama administration came to trying to limit the size of banks was in January, when the president proposed levying a fee on financial firms with assets of more than $50 billion.</p><p>The idea was never adopted by Congress.</p>